Between Pinterest and HGTV, there’s no shortage of inspiration for ways to turn your current dwelling into the home of your dreams. The real question often lies in your budget and how to fund those improvements.
Home Improvement versus Construction
Before lifting a hammer, it’s important to understand the difference between home improvement, renovation and construction, as the designation could impact your access to financial resources — including a loan.
For instance, one of the first questions your banker will ask is what type(s) of improvements you’d like to make. While some may colloquially use the terms “renovation”, “improvement” and “construction” interchangeably, for the purposes of home equity financing, there may be a big difference.
A home improvement or renovation is a minor change that allows you to still occupy your home and use that facility. Think of installing new kitchen cabinets and appliances or bathroom flooring. You can use the equity in your home to finance these types of updates; tapping into your home’s equity is a great tool to consider that helps meet your financial needs.
Construction is a major change that often adds square footage or alters the structure of your home. Examples include building an addition to accommodate your growing family or adding an in-law apartment for your aging parents. Major projects that require gutting a kitchen or bathroom may fall into this category as well. Unlike changes categorized as improvements, you cannot finance construction projects with equity in your home. Instead, you would need a construction loan.
Before Starting a Project, Know How You’ll Pay For It
If you’re excited about an improvement or renovation project, it can be tempting to get the work started as soon as possible. But Linda Lagarde, home equity consumer lending manager at Rockland Trust, urges homeowners to hold off until they have money in hand.
Linda noted, “If the project construction has already started and/or the homeowner isn’t living in the property or the utilities aren’t fully functional, we can’t move forward with home equity funding.”
The home equity funding process typically takes between 10 and 30 days to complete. Being prepared for the process and staying on top of needed documentation can make this process smoother.
The Value of Your Home
For financing purposes, it’s important to remember that your lender will review the current or “as is” value of your home when reviewing it for approval. While your project may add value to your home once completed, the lender can’t consider the anticipated value to help you secure financing.
Financing Your Vision: Home Equity Loan or Line of Credit?
If you’re going to undertake a home renovation project, you have a few options for financing. While you could refinance to get cash out of your home, you may not want to do that if you have a competitive rate on your existing mortgage. Instead, you could consider using the equity in your home. There are two types of home equity financing:
Home Equity Loan
A home equity loan is similar to other types of loans in that you get all of the funds at one time and pay interest and principal on the borrowed funds over the term of the loan. The amount of your loan is based on the current value of your home.
Home Equity Line of Credit
Commonly referred to as a HELOC, this financing option is based on the current value of your home and is a revolving line of credit with a variable rate, with the flexibility to meet your needs. It is a great option for home improvement projects that do not have a specified cost because you can borrow what you need and only pay interest on the funds that you borrow. HELOCs also allow for extra funds in case you need them.
Linda thinks that a HELOC is a great way to finance home improvements. “More often than not, homeowners start a project and it costs more than they initially planned,” she explained. “With a HELOC, you have the flexibility to draw more funds when needed without paying interest until the cash or check is in your hand.”
When considering a home equity loan versus a HELOC, you often need to choose whether you value a fixed rate or flexibility more. But with your Rockland Trust HELOC, you can have the flexibility of a line of credit with the predictability of a fixed-rate rate loan by converting a portion or all of your HELOC balance, which has a variable interest rate, into a fixed-rate loan.
Home Equity Line of Credit Calculator
The Process of Turning Home Equity into Home Improvements
If you’re thinking about using your home equity to improve your property (and maybe even increase its value), you should first talk to a banker to ensure that you’re looking at all of your financing options.
In order to secure a HELOC, your banker will need documents from you, including:
Unlike other types of loan applications, you are not required to list out other debts, such as credit cards or car loans, because this information is in your credit report.
After you begin your application process, be aware that an appraiser may come by to determine the value of your home. If this appraiser sees signs of work already in progress, like walls taken down or exposed plumbing and/or electric, that person may indicate that home equity financing is not appropriate, and that you’llneed a construction loan. If you have other questions about the process, we compiled answers to common home equity questions.
What Types of Improvements Are Popular?
Outdoor improvements, like adding an outdoor patio, deck or kitchen, are gaining popularity. The addition of an outdoor living space to enjoy when the weather is nice can be done through home equity financing
Another example is enclosing a deck or patio to create a three-season room. Because you do not need to knock down a wall, but instead just add a door, this type of improvement may also be covered by home equity financing.
Are You Considering a Home Improvement or Renovation Project?
If you’re thinking about a project and need financing, the best thing to do is talk to your banker about your plans and potential options. Our banking experts have helped thousands of homeowners like you through the home buying, improvement and renovation processes. Let us know how we can help turn a house into your dream home and achieve your financial goals.
